BRIEFING

Yung Kee an offshore perspective: the winding up of BVI and Cayman Islands companies in Hong Kong

MAY 2013
For more briefings visit mourantozannes.com This briefing is only intended to give a summary and general overview of the subject matter. It is not intended to be comprehensive and does not constitute, and should not be taken to be, legal advice. If you would like legal advice or further information on any issue raised by this briefing, please contact one of your usual Mourant Ozannes contacts.

Contacts: Nicholas Fox Managing Associate, Cayman Islands Shaun Folpp Partner, BVI Paul Christopher Managing Partner, Hong Kong For contact details, please see the end of this briefing.

BVI and Cayman companies have long been a valuable feature of commercial life in Hong Kong and China. Such companies offer many benefits including flexibility, asset security and tax-neutral status. Both the BVI and Cayman Islands enjoy advanced legal and regulatory infrastructures derived from the English common law, together with longstanding political and judicial stability, making them ideal jurisdictions for corporate domicile. In most cases, the simplest and most cost effective route to wind-up such companies will be to commence proceedings against them in their home jurisdictions. Unaware of this fact, it is still relatively common for individuals to commence proceedings in respect of such companies in other jurisdictions, principally those jurisdictions in which they do business, seeking to rely on the foreign court's jurisdiction to wind up a "foreign company". In several such recent cases, the Hong Kong Court of First Instance has confirmed that whilst it possesses an 'exorbitant' jurisdiction to wind up foreign companies, it will only do so where such companies have a sufficiently strong connection with Hong Kong. This article provides a broad overview of the recent Hong Kong decisions1 and outlines some of the key benefits of commencing proceedings in a company's home jurisdiction, together with some of the protections offered to the company's shareholders under BVI and Cayman law.

Hong Kong Cases In three cases decided within the last year, the Court of First Instance has considered whether it is able to wind up companies incorporated outside Hong Kong and the circumstances in which it will do so. These cases are Li Jianguo v Wei Wei and Pacific Overseas Investment Ltd2 ("Pacific"), In Re Yung Kee Holdings Ltd3 ("Yung Kee") and In Re Pioneer Iron and Steel Group Co Ltd4 ("Pioneer"). All three cases involved BVI companies5, none of which had registered in Hong Kong (as they would have been required to do if any of them had established a place of business there). In the first two cases, the companies' shareholders brought petitions seeking winding up orders from the Hong Kong Court under section 327 of the Companies Ordinance ("CO"). Pioneer involved a similar petition, but brought by the liquidators who had already been appointed over the company in the BVI. Yung Kee also involved a claim for relief from 'unfair prejudice' under section 168A of the CO, in the form of an order compelling the majority shareholder to purchase the minority shareholder's shares. Winding-Up Petitions In all three cases the Hong Kong Court confirmed that section 327 grants it a discretionary jurisdiction to wind up an unregistered foreign company. However, this jurisdiction is 'exorbitant' and will be exercised only in cases where the petitioner

Please note, Mourant Ozannes does not practice or advise upon Hong Kong law and this review does not purport to be comprehensive or to provide legal or taxation advice. [2012] 3 HKLRD 453 judgment dated 23 May 2012. HCCW 154/2010 judgment dated 31 October 2012. HCCW 322/2010 judgment dated 6 March 2013. Pacific also involves a second company incorporated in Samoa.

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establishes that the company in question has a connection with Hong Kong that is "sufficient to justify the court setting in motion its winding-up procedures over a body which prima facie is beyond the limits of territoriality." This is a high threshold, especially in cases related to shareholder disputes (as opposed to corporate insolvency). In most cases, in order for the Hong Kong Court to act, it will require proof that three core requirements are met, namely that: 1. There is sufficient connection with Hong Kong. Where a winding-up is sought on grounds of insolvency, the presence of assets within Hong Kong will be a key factor. Where the winding-up is sought on other grounds, the presence of assets alone may not be sufficient and other factors are likely to be more important, such as the location where the company primarily carries on its business (which may be the location at which a commercially active company's controlling mind is based), the shareholders' connection with Hong Kong, and where the matters giving rise to the dispute occurred. 2. There is a reasonable possibility that the winding-up order would benefit those applying for it. 3. The Hong Kong Court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company's assets. In the large majority of insolvency cases this requirement will be satisfied by a creditor who is an individual resident in Hong Kong, or a foreign company which is registered under Part XI of the CO or which has a place of business in Hong Kong. The Hong Kong Court will apply the same stringent approach, regardless of whether the petition is presented by the company's shareholders or the company itself. Unfair Prejudice In order to qualify for relief under section 168A of the CO, a foreign company must have established a place of business in Hong Kong. This is different from 'carrying on business' in Hong Kong and will normally require a company to have, "business activities of some substance, which have to be undertaken

sufficiently regularly to justify establishing a base in Hong Kong." The mere carrying out of certain internal affairs in Hong Kong would not necessarily indicate that the company had established a place of business there. Consequences The results of these cases demonstrate the difficulties facing petitioners who choose to litigate outside of companies' home jurisdictions. In Pacific, the Hong Kong Court found there to be an insufficient connection with Hong Kong, despite the company having assets in that jurisdiction. Similarly, in Yung Kee the Hong Kong Court found that it did not have jurisdiction under section 168A and that there was insufficient connection with Hong Kong to justify winding up the company under section 327. As Harris J said dismissing the petition in Yung Kee: "I would emphasise that this result is not a consequence of the 1st and 2nd Respondents taking a clever, technical point it is a consequence of [the company's original owner], on advice from a professional, consciously distancing the ultimate ownership of his assets from Hong Kong through the use of a complex corporate structure with a view to avoiding paying estate duty and contributing to the income of the Hong Kong Government." The Better Approach In many cases, BVI and Cayman companies will not be used alone, but will instead be part of sophisticated corporate structures involving a number of other companies. Often, they will not hold assets or carry out business activities in countries such as Hong Kong or China. As a result, there will often be insufficient connections with such countries to enable proceedings for winding-up orders and other relief to be pursued there successfully. This is especially likely to be the case where such litigation relates to holding companies and arises out of shareholder disputes. In such situations, parties may save themselves a great deal of time and money by focusing their efforts upon obtaining relief from the BVI and Cayman courts themselves, rather than looking elsewhere. In many cases, such efforts will be in tandem with appropriate further steps in related foreign jurisdictions, with a view to maximising the protection of

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MAY 2013

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stakeholders' interests. The good news is that the courts of the BVI and Cayman are readily accessible, highly specialised in commercial matters and very experienced in dealing with shareholder disputes. BVI and Cayman law are both based on English common law principles, so that the BVI and Cayman courts offer similar relief to that available in Hong Kong. There are also a number of highly reputable international law firms that practice from these jurisdictions and can offer representation. BVI Law Remedies In Yung Kee, Harris J said that the petitioners, " are shareholders in a BVI company and they can take their dispute to the courts of the jurisdiction in which the Company is incorporated which provides remedies, which are for all practical purposes the same as those available here" Any shareholder of a BVI company may petition the BVI Court to make a windingup order in respect of it. As in Hong Kong, petitions may be brought on the grounds of insolvency, or that it would be just and equitable for the company to be wound up. The 'just and equitable' ground is very broad, and includes cases where the company's substratum has failed; there is deadlock in the company's management (both of which were alleged in Pacific); the company operates as a 'quasi-partnership' and the petitioners legitimate expectations have been breached (as argued in Yung Kee); there has been fraud in the formation or running of the company or there has been a loss in confidence in management, due to a lack of probity in their conduct of the company's affairs. The BVI also offers a distinct set of 'minority oppression' remedies that are available to a shareholder if the Court considers that the affairs of the company have been, are being or are likely to be conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to the shareholder in his capacity as a shareholder. In such cases, if the BVI Court considers it just and equitable to do so, it may make any order that it thinks fit, including, but not limited to, orders: requiring the company or any other person to acquire the shareholders' shares;

requiring the company or any other person to pay compensation to the shareholder; regulating the future conduct of the company's affairs; amending the company's memorandum or articles; appointing a liquidator or receiver of the company; directing the rectification of the company's records; and/or setting aside any decision made or action taken by the company or its directors in breach of the BVI Business Companies Act, or the company's memorandum or articles. Cayman Law Remedies The protections offered in the Cayman Islands are very similar to those outlined above. Again, any shareholder of a Cayman company may petition the Cayman Court for a winding up order on grounds that the company is unable to pay its debts or that it would be just and equitable for the company to be wound up. The 'just and equitable' ground is similarly broad in Cayman as it is in the BVI. In Cayman, the minority protection provisions operate differently, so that minority protection claims are not expressly provided for within the statute. Instead shareholders are required to pursue just and equitable winding up petitions and, if successful, these allow the Cayman Court to make a variety of orders in the alternative to winding up. Examples of the types of orders the Cayman court can make include orders: regulating the conduct of the company's affairs in the future; requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do; authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct; and/or providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company
MAY 2013

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itself, a reduction of the company's capital accordingly. Other Factors In appropriate cases, both the BVI and Cayman courts can appoint domestic and foreign liquidators, who may then take steps in their respective jurisdictions to secure company assets for the benefit of their stakeholders. For example, in Pioneer liquidators based in both the BVI and Hong Kong were appointed under BVI law. Those liquidators later took the view that it would be advantageous for the company to apply to be wound up by the Hong Kong Court as well, so that they could utilise powers available under Hong Kong law to examine certain people related to the company. Over the last twenty years, a significant number of countries have enacted legislation in the field of cross-border insolvency. Many of them now provide mechanisms for the recognition of liquidators appointed by the companies' home courts. By contrast, there is no guarantee that orders obtained in respect of BVI and Cayman companies in foreign countries, such as Hong Kong, will be recognised either locally in the BVI and Cayman Islands, or by the courts of other countries. If such recognition is required, it can often lead to further difficult and costly litigation. In those circumstances, and in respect of BVI and Cayman companies, it may well be advisable for litigants to seek winding up orders in the BVI or Cayman Islands first and then for that liquidator's appointment to be recognised in Hong Kong (or elsewhere) in accordance with the domestic laws relating to recognition of foreign insolvency practitioners.

Conclusion Many litigants are understandably reluctant to bring proceedings outside of the countries in which they reside. However, those people sophisticated enough to use BVI and Cayman companies should be reassured that both these countries benefit from mature legal systems with advanced levels of shareholder and creditor protection. In the event that difficulties occur, often the best course of action will be to consult with lawyers practicing BVI and Cayman law about what steps can be taken within those countries to obtain the necessary relief. Mourant Ozannes has one of the largest and most successful litigation and insolvency teams in the Caribbean and, globally, has the largest litigation and insolvency team of any offshore law firm. It has offices in the BVI, Cayman Islands and Hong Kong, together with Jersey, Guernsey and London, enabling it to offer straightforward and clear advice on BVI, Cayman, Guernsey and Jersey law to anyone interested in matters related to those jurisdictions.
Contacts: Nicholas Fox, Managing Associate, Cayman Islands nicholas.fox@mourantozannes.com Shaun Folpp, Partner, BVI +1 284 852 1777 shaun.folpp@mourantozannes.com Paul Christopher, Managing Partner, Hong Kong +852 3995 5701 paul.christopher@mourantozannes.com

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MAY 2013